Thursday, December 31, 2009

Trade Protection = Economic War on Yourself

The chart displays the volume of U.S. exports of goods and services, in inflation-adjusted dollars, annually from 1929 to 1945 (data from Global Financial Data, subscription required), showing that U.S. exports fell roughly the same percentage amount from the combined effects of the Great Depression and the Smoot-Hawley Tariff Act of 1930 (-46% from 1929 to 1932) as from the effects of WWII (-44.3%).

China needs the U.S. more than the U.S. needs China, and it's not a threat to the U.S. economy.

In 2008, the U.S. trade deficit with China was a record. The U.S. exported $70 billion to China and imported $338 billion from China, or a $268 billion trade deficit. This is in the context of a $14 trillion U.S. economy.

Most of U.S. exports to China were capital goods (e.g. inputs for their exports), while most of U.S. imports from China were consumer goods. So, much of China works for the U.S., like Japan before it. If China stops working for the U.S., another Third World country, or the U.S., will take up the slack.

China can't dump its $2 trillion in dollar reserves without severe consequences. If it did, it's currency, the Yuan, would appreciate, and the dollar would depreciate. The exchange would cause China to receive fewer and fewer Yuans per dollar, while its production would implode and U.S. production would increase.

China is not in a good economic situation. It produces heavy goods. So, it needs (expensive) commodities, e.g. oil, copper, steel, etc. It also produces goods with declining prices, which developed countries no longer want to produce.

So, China is in a much weaker position in the global economy than people believe. It needs to maintain acceptable employment levels, at the expense of smaller gains of trade.

James Fallows studied American history and literature at Harvard, where he was the editor of the daily newspaper, the Harvard Crimson. From 1970 to 1972 Fallows studied economics at Oxford University as a Rhodes scholar.

January/February 2008

Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus—$1.4 trillion and counting, going up by about $1 billion per day—that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China.

Any economist will say that Americans have been living better than they should—which is by definition the case when a nation’s total consumption is greater than its total production, as America’s now is. Economists will also point out that, despite the glitter of China’s big cities and the rise of its billionaire class, China’s people have been living far worse than they could. That’s what it means when a nation consumes only half of what it produces, as China does.

Neither government likes to draw attention to this arrangement, because it has been so convenient on both sides. For China, it has helped the regime guide development in the way it would like—and keep the domestic economy’s growth rate from crossing the thin line that separates “unbelievably fast” from “uncontrollably inflationary.” For America, it has meant cheaper iPods, lower interest rates, reduced mortgage payments, a lighter tax burden. The average cash income for workers in a big factory is about $160 per month. On the farm, it’s a small fraction of that. Most people in China feel they are moving up, but from a very low starting point.

This is the bargain China has made—rather, the one its leaders have imposed on its people. They’ll keep creating new factory jobs, and thus reduce China’s own social tensions and create opportunities for its rural poor. The Chinese will live better year by year, though not as well as they could. And they’ll be protected from the risk of potentially catastrophic hyperinflation, which might undo what the nation’s decades of growth have built. In exchange, the government will hold much of the nation’s wealth in paper assets in the United States, thereby preventing a run on the dollar, shoring up relations between China and America, and sluicing enough cash back into Americans’ hands to let the spending go on.

Smoot Hawley for the U.S. in the new century has been the smugness about U.S. prosperity in the last century -- a new paradigm of trade control by Chinese authorities can't seem to be widely adknowledged in this century.

Page 64 on Trading Rights and Local Content Rules ("Buy Chinese") are particularly explained. "China regularly follows rules that direct central and sub-central entities priority to local goods and services with limited exception."

Forty percent of the Chinese industrial economy is owned by the state and therefore is not subject to any WTO rules.

I have made the time to read the report regarding economic issues and I hope many others will do the same. The great irony is that the Chinese people are very smart and hard working; they would probably be much more successful in a capitalist free trade country.

The stance of many libertarian economists does not seem to acknowledge the trade policies of China. This seems to degrade the free trade movement arguments which is unfortunate.

In the report is a study of upper New York State's economy as a result of China/U.S. trade relations. This is very disturbing and a perhaps sad precursor for many other regions of the U.S. The last ten years have been delusional and devastating for the U.S.